SEC Immune from Investors’ Suit Over Madoff, Says Appeals Court

Investors who said they lost money in Bernard Madoff’s fraud may not pursue a lawsuit against the U.S. Securities and Exchange Commission for missing the swindler’s Ponzi scheme, a federal appeals court said on Monday.

The 9th U.S. Circuit Court of Appeals in Pasadena, California said a federal district judge correctly dismissed their lawsuit seeking to hold the SEC responsible under the Federal Tort Claims Act.

Citing a 2009 report by the regulator’s inspector general, investors led by Dichter-Mad Family Partners LLP in Florida said they would not have invested with Madoff had the regulator availed itself of “multiple opportunities” to stop the fraud.

They said they instead relied on the regulator’s “implied stamp of approval” prior to investing, and sought to recover losses they attributed to SEC negligence.

But the 9th Circuit in an unsigned order said the plaintiffs’ claims fell within the regulator’s “discretionary functions,” depriving courts of jurisdiction to hear the appeal.

“I respectfully disagree with the decision, and intend to seek further appellate review,” Richard Gordon, a lawyer who is one of the plaintiffs and argued the appeal, said in a telephone interview.

SEC spokesman John Nester said in an email: “The decision speaks for itself.”

Monday’s order upheld an April 2010 ruling by U.S. District Judge Stephen Wilson in Los Angeles.

In April 2011, a Manhattan federal judge dismissed a similar lawsuit by two other Madoff investors.

An exhaustive August 2009 report by SEC Inspector General David Kotz outlined how the regulator failed to uncover Madoff’s fraud by missing many red flags, disregarding tips, and failing to follow up properly on leads.

Madoff, 74, pleaded guilty in March 2009 and is serving a 150-year prison sentence.